Learning Outcome C

Question 1

What is the purpose of accounting?

Answer 1

• Provide the information that is needed for sound decision making.
• To prepare financial reports that provide information about a firms performance.

Question 2

What are the 5 purposes of accounting?

Answer 2

Recording transactions, management of the business, compliance, measuring performance, control.

Question 3

What is the explanation of Recording Transaction?

Answer 3

• Business owner must record all sales (income) and bills (expenses).

Question 4

What is the explanation of Management Of The Business?

Answer 4

• Planning, monitoring and controlling of resources they are responsible for. – involves coordination of resources e.g. staff and stock.

Question 5

What is the explanation of Compliance?

Answer 5

• Financial reporting is governed by laws and regulations.

Question 6

What is the explanation of Measuring Performance?

Answer 6

• Without accounting it would be impossible to know whether the business is making a profit or a loss.
  The key indicators of financial performance:
  = Sales revenue.
  = Gross profit.
  = Net profit.

Question 7

What is the explanation of Control?

Answer 7

• Assisting with the prevention of fraud, trade receivables, and trade payables.
• Accounting allows the business to take control of its finances as it knows the income and outgoings.

Question 8

What are Trade Receivables in terms of control as a purpose of accounting?

Answer 8

Are amounts billed by a business to customers when it delivers goods or services to them – documented on formal invoices.

Question 9

What are Trade payables in terms of control as a purpose of accounting?

Answer 9

Amount of money that a business owes to suppliers.

Question 10

What are benefits of the purpose of accounting : Recording Transactions?

Answer 10

+ Helps to make informed and precise decisions at any time.
+ Helps to remember to pay bills as, failure to chase payments or forgetting to pay bills can mean trouble with HMRC.

Question 11

What are benefits of the purpose of accounting : Management Of The Business?

Answer 11

+ Ensures there are sufficient funds to pay wages, order new stock, pay bills & and meet other cash outflows by balancing with income from sales.

Question 12

What are benefits of the purpose of accounting : Compliance?

Answer 12

+ Comply with laws and regulations to ensure shareholders are not misinformed.
+ Being compliant prevents the risk of fraud.

Question 13

What are benefits of the purpose of accounting : Measuring Performance?

Answer 13

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Question 14

What are benefits of the purpose of accounting : Control?

Answer 14

+ Enable the business to have a clear picture of its trade receivables and payables.
+ Helps to prevent fraud as transactions will flag as being unusual.

Question 15

Profit definition:
+ calculation

Answer 15

When total revenue (income) from sales is higher than the total costs to. a business.
Total Revenue - Total Costs.

Question 16

Loss definition:

Answer 16

Shortfall suffered when total revenue from sales is lower than the total costs to a business.

Question 17

Gross profit:
+ Calculation

Answer 17

Sales Revenue - Cost Of Goods Sold.

Question 18

Sales revenue:
+ Calculation

Answer 18

Quantity Sold x Selling Price.

Question 19

Net profit:
+ Calculation

Answer 19

Gross Profit - Other Expenses.

Question 20

What are 5 sources of CAPITAL income?

Answer 20

Loans, Mortgages, Shares, Owners Capital, Debentures.

Question 21

What are loans?
(CAPITAL income)

Answer 21

The transfer of money by one party to another with an agreement to pay it back + interest.

Question 22

What are mortgages?
(CAPITAL income)

Answer 22

A loan used to buy a property or land.
If pay early = fine.
Most run for 25 years.
Repossession of do not pay regular payments.

Question 23

What are shares?
(CAPITAL income)

Answer 23

Buying shares gives the buyer part ownership of the business. - unit of ownership in a company.

A company can issue shares to raise capital. Shareholders are owners of the business and usually receive voting rights. A shareholder receives income in the form of dividends if the business is profitable.

Question 24

What is owners capital?
(CAPITAL income)

Answer 24

The amount the owner of a business has invested in their business using their personal savings. (The proportion of the total assets funded by the owners money).

Question 25

What are debentures? (CAPITAL income)

Answer 25

A debenture is an instrument used by a lender, such as a bank, when providing capital (money used to build, run or grow a business) to companies and individuals.

Question 26

What are the main points about debentures?

Answer 26

= Money used to build, run or grow a business. = Medium to long term source of finance. = Large companies use them to source income - Credit worthy? Good reputation? = Small companies not use them as may not have built this. = Pay an interest rate. = Redeemable or repayable on a fixed date. = Company typically makes these scheduled debt interest repayments before they pay stock dividends to shareholders. = Advantageous to companies as carry lower interest rates and longer repayment dates.

Question 27

What are 5 sources of REVENUE income?

Answer 27

Sales, Rent Received, Commission, Interest Received, Discount Received.

Question 28

What are sales? (REVENUE income)

Answer 28

Income from selling products or services. Can be from cash or credit sales.

Question 29

What is rent received? (REVENUE income)

Answer 29

The rent which is received by the owner from the tenant for providing facilities to the tenant for a specific period of time.

Question 30

What is commission? (REVENUE income)

Answer 30

When a business or individual sells a product on behalf of another business. If sale is successful then the seller receives commission e.g. YouTubers.

Question 31

What is interest received? (REVENUE income)

Answer 31

Money made from savings or investments. Revenue income = If a business is paid interest for an investment they have made or the balances they have in their account.

Question 32

What is discount received? (REVENUE income)

Answer 32

A business pays a reduced price for goods or services. If a business pays a supplier quickly then that business may receive a discount, this in turn has decreased the cost to the business.

Question 33

What are intangibles? (Expenditure)

Answer 33

Something you cannot touch, not a physical item.

Question 34

What are 5 examples of intangibles? (Expenditure)

Answer 34

1. Patent. 2. Trademark. 3. Goodwill. 4. Brand Recognition. 5. Intellectual Property.

Question 35

What are Patents? (An intangible)

Answer 35

- A patent is the legal protection of an invention, such as a unique feature of a product. - Allows the business to exploit this in the future by launching an innovative product at a premium selling price.

Question 36

What are Trademarks? (An intangible)

Answer 36

- A symbol, logo, brand name or even a colour that sets apart one's business or goods from those of its competitors. - Can be a key influence on consumer choice and build strong brand loyalty.

Question 37

What is Goodwill? (An intangible)

Answer 37

- Purchasing an existing business, its name and reputation will already be known, it may have an established customer base. - Increases value of the business and increases the selling price of the business. - A sum of money is added to the value of the business to reflect the value of this goodwill.

Question 38

What is Brand Recognition? (An intangible)

Answer 38

- A feature of a business recognised by customers and distinguishes a business from its competitors.

Question 39

What is Intellectual Property? (An intangible)

Answer 39

- Intellectual property is something that you create using your mind. For example, a story, an invention, an artistic work or symbol.

Question 40

What is capital expenditure?

Answer 40

Funds used to acquire or upgrade physical assets such as property, buildings or equipment and also intangibles.

Question 41

Capital expenditure is a long term source of income?

Answer 41

TRUE.

Question 42

What are examples of capital expenditure?

Answer 42

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Question 43

What is revenue expenditure?

Answer 43

Money spent by the business on the day to day running of the business.

Question 44

Revenue expenditure is a short term source of income?

Answer 44

TRUE.

Question 45

What will the amount of money spent by a business depend on?

Answer 45

It depends on the type of the business being run.